Optimizing Outsourcing Arrangements in Facilities

The current state of outsourcing Facilities services

Contracted services are not a new strategy for higher education institutions. In fact, most institutions have contracted or outsourced some task or function within their Facilities division. However, in the past, senior leaders focused outsourcing arrangements on only a handful of areas (such as custodial services, auxiliaries, and highly specialized tasks).

Today, higher education leaders increasingly view outsourcing arrangements as a potentially effective solution to the growing pressures facing their Facilities departments. Four major pressures and the possible benefits that outsourcing provides are detailed below.

Historically, senior leaders in higher education have approached outsourcing primarily as a cost-cutting strategy. Specifically, for many institutions, outsourcing has helped alleviate budget pressures brought on by dwindling enrollments and/or declining state support. The University of Alaska Fairbanks, for instance, outsourced 75% of its custodial services in 2003 as part of a general cost savings exercise. However, in 2011 the institution outsourced the remaining 25% of its custodial services during an enrollment decline, saving an additional average of $900K per year.

Nevertheless, institutions are increasingly turning to outsourcing to accomplish other goals like improving service levels or redistributing staffing resources. For example, one institution outsourced the maintenance and care of its athletic fields to free in-house staff for other campus priorities.

Moreover, institutions have realized the potential for outsourcing to advance strategic goals—even if it comes at a higher price tag. Providence College in Rhode Island, for instance, outsourced its custodial services even though the contract was more expensive than current in-house work. However, the vendor drastically improved the campus’ aesthetic appeal as measured by prospective and current student surveys, which helped Providence achieve its goals of increased enrollment and higher retention rates.

Range of outsourcing options in higher education

Contracted and outsourced arrangements take on many forms, reflecting the strengths and needs of both institutions and vendors. Arrangements range from hiring a small vendor to remove snow or maintain elevators to entrusting the entire operations of Facilities to a third party. While these options share a common purpose of delegating work to another party, they diverge heavily in their execution. There are four major contracting arrangements available to higher education institutions:

• Out-tasking
• Auxiliary outsourcing
• Functional outsourcing
• Integrated Facilities management

Outsourcing not always a good outcome

While promising, pursuing more extensive outsourcing relationships is a new and challenging exercise for most institutions. Institutions face three main challenges when considering outsourcing arrangements:

Executive framework for better outsourcing

To help leaders better navigate Facilities outsourcing, this publication offers three sets of resources to successfully evaluate and implement an outsourced arrangement. While many considerations included in this brief have relevance for all Facilities contracting decisions, this research specifically explores whether and how to outsource a single Facilities function or sub-function.

1. Improve the outsourcing decision analysis
2. Strengthen the outsourcing arrangement by avoiding unanticipated mistakes
3. Implement oversight processes to manage vendor relationship

The first section provides guidance on evaluating the benefits of outsourcing a particular function or sub-function. The second section explores mistakes to avoid when developing an outsourcing contract. Finally, the third section explores processes and strategies to effectively manage a relationship with a vendor and achieve desired results.

Improve the outsourcing decision analysis

As institutions recognize that outsourcing holds greater promises, some senior Facilities officers have become overwhelmed by the numerous factors involved in the decision to outsource. Moreover, many senior Facilities officers have found themselves in unsatisfactory relationships with a vendor, instilling skepticism about future arrangements. For example, some institutions do not realize the anticipated savings or service levels from outsourcing. Others find desired cost savings come with unexpected reductions in response times to customer calls, leading to dissatisfied campus stakeholders. These shortcomings have led some institutions to question their initial decision to outsource.

To avoid these pitfalls, this section details six considerations for improving outsourcing decisions through a more complete analysis. For institutions evaluating potential outsourcing arrangements, note that the opportunity does not need to meet every consideration outlined here. Instead, most arrangements will spike on three or four of the considerations.

Consideration 1: Comprehensive value for money analysis

The first consideration is to perform a comprehensive Value for Money (VfM) analysis. Many institutions consider the potential cost savings of outsourcing a function, but this often represents only a partial analysis. A comprehensive VfM analysis involves evaluating actual valuations and potential valuations.

Actual valuations are the guaranteed financial costs or savings of an outsourcing arrangement. These might include upfront and ongoing payments to the vendor, administrative and legal fees, contract management and quality assurance costs, and signing bonuses.

Institutions frequently include anticipated costs in their upfront analysis but may not fully forecast these costs over the life of the contract. For example, institutions may write off capital improvements made by the service provider in the short term. However, a long-term assessment of the maintenance and renewal costs of those improvements may change the equation.

Beyond actual valuations, institutions must also consider potential valuations. Potential valuations encompass all financial gains or losses that may be incurred during the life of the contract but can neither be guaranteed nor fully eliminated. These valuations vary both in the magnitude of their impact as well as the likelihood of their occurrence in any given arrangement, which can make them challenging to quantify.

High “rebuild” costs limit Facilities agility

Of all the potential valuations, rebuild costs tend to be the highest. In fact, high rebuild costs can lock institutions into outsourcing arrangements even if a senior Facilities officer finds opportunities for improvement through alternative vendors or in-house structures. There are five reasons rebuild costs make alternative arrangements challenging to pursue:

Consideration 2: Complexity of the function

The second consideration to determine the viability of outsourcing a function is to evaluate the function’s complexity. The graphic below maps various Facilities functions on a spectrum of low to high complexity. The most promising opportunities for outsourcing fall on either end of the spectrum.

For example, functions with large amounts of low-complexity tasks, such as custodial services, have strong outsourcing potential. Expensive benefit packages—at rates as high as 40% beyond salary—make up a disproportionate share of costs for largely transactional work. Therefore, outsourcing low-complexity work can reduce Facilities costs with little impact on the quality of work performed.

On the opposite end of the spectrum, functions with large amounts of high-complexity tasks, such HVAC maintenance, frequently have extensive technical and legal requirements. These tasks require individuals with unique skillsets, specialized knowledge, and extensive experience who can be challenging to source, offer a competitive salary, and retain. High-complexity work is therefore also a good candidate for outsourcing.

Maintaining middle-complexity functions in house

In general, functions that fall in the middle of the spectrum have typically been the least promising outsourcing opportunities for four reasons. First, these functions employ skilled tradespeople (such as mechanics or electricians) with flexible skillsets that can be deployed against many different assets and systems across campus. Second, these employees are often very tenured and possess a great deal of institutional knowledge that Facilities departments do not want to lose, such as knowing which circuit breaker to check first for problems. Third, there are more candidates with medium-skill backgrounds in the market than those with higher-skilled expertise. Finally, these roles have lower turnover than their lower-skill equivalents.

However, as higher education campuses become more technology-dependent and the systems overseen by Facilities evolve in complexity, tasks that previously required moderate skill increasingly require more training or experience to complete. For example, software-based building automation systems and equipment-monitoring sensors may increase the level of technological and data literacy required by maintenance workers. Therefore, some institutions are exploring new opportunities to outsource traditionally inhouse functions, particularly for recently built or renovated spaces.

Consideration 3: Value of incremental improvement to service levels

The third consideration to determine the benefit of outsourcing is to pinpoint the value of incremental improvement to a function’s performance level. Institutions must evaluate the service level they require from the function, as well as how outsourcing might impact its performance. There are two main reasons outsourcing may lead to improvements in service levels.

1. Experience and innovation: Vendors often possess extensive experience with particular functions that equips them with more expertise than in-house staff currently possess, allowing them to provide higher service levels and more efficiently. Additionally, the business model for vendors encourages innovation and technological investment. Outsourcing can therefore bring improved techniques to campus before they become mainstream elsewhere.
2. Speed of improvement: A new vendor approaches the work with a clean slate and typically makes significant changes in a short period of time. This can allow for more rapid improvements in service levels than incremental improvements done in house.

One institution that successfully leveraged vendor expertise for improved service is Leno College (pseudonym). They outsourced their warehouse to improve the function quickly instead of over a long period of time. Within a year the institution saw significant increases in the warehouse service levels as measured by response time. This simultaneously provided additional benefits for Facilities functions that utilize the warehouse, including fewer duplicate parts ordered.

For isolated functions or ones that Facilities already performs well, improvements in service level through outsourcing may have little impact on campus customer satisfaction. Functions where service level improvements increase customer satisfaction at higher rates—or alternatively, where decreases in service level have little impact on customer satisfaction—represent significant opportunities to outsource. As well, outsourcing does not always improve service levels. There are two main reasons why outsourcing may instead decrease the observed service levels of a function.

1. Misaligned expectations: Institutions and vendors may not agree on service level definitions and results. This may result in the vendor failing to meet institutional expectations.
2. Lack of responsiveness: Outsourced staff may not respond to problematic or sensitive situations as rapidly as in-house teams, typically because outsourced staff have to go through more levels of communication and may not recognize which problems should take priority. This may result in decreased customer satisfaction and perception of service.

Consideration 4: Expected frequency of the activity

The fourth consideration is to evaluate the expected frequency of the function’s activity. Frequency is already a major factor in the decision to out-task seasonal (e.g., leaf blowing), infrequent (e.g., window cleaning), and unpredictable work (e.g., snow plowing). Likewise, whole functions or sub-functions that are only occasionally or unpredictably performed may be good candidates for outsourcing.

Activity frequency of some functions may differ from campus to campus. One example of this is project management. Institutions with large campuses or large amounts of capital projects may regularly use project management staff. However, many institutions need extensive project management teams only for the occasional large construction or renovation project. Outsourcing project management would be more promising for the latter type of institution rather than the former. Therefore, institutions should evaluate how frequently they anticipate functional demand when deciding whether to outsource it.

Consideration 5: Staffing burden on HR

The fifth consideration is to determine the intensity of a function’s demand on human resources (either within the Facilities department or as a central service). While all functions require HR support, certain roles, such as those with high turnover rates, demand more from human resources and are often good outsourcing candidates. There are five HR tasks that outsourcing can eliminate or reduce.

HR problems that outsourcing helps reduce

Consideration 6: Strategic value of the function to goals

The final consideration is to match the strategic value of a function to institutional goals. All Facilities functions contribute directly or indirectly to the achievement of institutional strategic objectives, such as increasing retention or improving campus satisfaction. When determining whether to outsource a function, institutions should first identify the strategic goals the function impacts. Then, leaders should map how each outsourcing option improves or detracts from the goals. The following table provides three examples of institutions connecting outsourcing options to strategic goals.

Considerations for bringing a function back in house

While the bulk of senior leaders’ attention should be spent evaluating the viability of outsourcing arrangements, the same exercise can be useful to determine whether to bring an outsourced function back in house. One institution that went through this exercise is Southern Methodist University (SMU). In 2011, SMU outsourced all major Facilities services, including grounds, custodial, operations, maintenance, and management, to a single vendor.

In early 2017, despite year-over-year contract amendments, senior leaders at SMU realized that a new structure for Facilities management would yield more efficient operations and better advance strategic goals. In particular, they recognized that returning management of Facilities to their office of planning and management would compliment the institution’s long-range strategy of enhancing campus services at no additional cost to their budget. Following this decision, SMU opted to evaluate each function separately to determine whether to keep it outsourced or return it in house.

Facilities outsourcing decision worksheet

This tool guides senior leaders through the first step of a more comprehensive evaluation process to determine the viability of outsourcing a function or sub-function. To use this tool effectively, leaders must possess a basic understanding of the scope, responsibilities, costs, and activity of the function or sub-function in question.

Jump to the Tool

Strengthen the outsourcing arrangement by avoiding unanticipated mistakes

Once an institution has decided to outsource a function, the next stage is to choose a vendor and establish a contract to govern the relationship. This requires that institutions articulate their expectations from a vendor, including criteria that inform the RFP (request for proposal) vendor selection, and contract negotiation process. Most institutions have significant experience in the early steps of creating committees and developing RFPs from regularly engaging in contracting (e.g., out-tasking). By comparison, vetting the vendor and contract negotiation often demand the most time and energy from Facilities leaders and therefore pose the most pitfalls. This section first explores strategies to evaluate service providers. It then surfaces five common mistakes when creating an outsourcing contract, and offers ways institutions have successfully mitigated negative impacts on their arrangements.

Characteristics of successful outsourcing vendors

Beyond obvious factors like cost and service levels, institutions with long histories of outsourcing point to four key characteristics leaders should look for in a service provider:

• Higher education experience (or experience in similarly sized private companies)
• Proven success on campuses with similar characteristics (e.g., size, population, location)
• Deep bench of managerial staff to allow for rapid replacement and succession
• Clear processes for communicating with both Facilities leaders and the wider campus community

Institutions should verify that service providers meet these criteria during the selection process. To demonstrate their expertise, vendors typically provide case studies showcasing their performance at other organizations. However, institutions should take steps to independently evaluate and verify a vendor’s capacity

Once the institution has selected a partner, the next milestone is to craft a contract that establishes service levels and governs the relationship. Senior Facilities officers with significant outsourcing experience report that negotiations typically take more time than anticipated, sometimes over a year. However, it is critical to spend time and resources on this process, as a poorly defined contract can undermine an outsourcing arrangement and make it nearly impossible to repair. In particular, there are five mistakes to avoid when negotiating the contract.

Mistake 1: Giving up strategic and managerial control

The first mistake institutions make is to give up strategic and managerial control of a function. Senior leaders have many responsibilities on their plate, and outsourcing is a common means to offload some of that work. However, some institutions have taken this opportunity to selectively offload task management rather than task completion—to detrimental effect.

In the mid-1990s, Colbert University (pseudonym) outsourced its Facilities management leadership but kept all frontline staff in house. Leaders hoped to improve performance through external expertise and management. However, outsourced managers instead worked to maximize profit by minimizing costs— namely, neglecting to invest in equipment or replacement vehicles. The lack of updated assets prevented Facilities workers from completing tasks efficiently and to desired service levels. The institution eventually had to go through the costly and time-intensive process of preemptively ending their contract and rebuilding their management team in house.

To avoid this mistake, institutions should focus their contract on absorbing transactional, day-to-day tasks. As outsourcing a function only offloads the completion of specific work (and never the responsibility for ensuring the work is done), arrangements are most effective when the institution retains its ability to set function vision and goals, prioritize tasks and campus spaces, and evaluate the function’s performance based on institutional objectives.

Mistake 2: Leaving expectations and responsibilities vague

The second mistake institutions make is leaving expectations and responsibilities vague. This typically arises when parties have not established clear performance requirements in the contract negotiation process. As a result, the institution assumes the vendor will perform certain tasks or provide their own materials and supplies—regardless of the actual contract specifications. Concurrently, the service provider may assume that the institution maintains responsibility over every task not explicitly included in the contract. This can lead to miscommunication and frustration, ultimately reducing the effectiveness of the arrangement. To build a strong contract, institutions must detail at length the expected responsibilities first in the RFP and then negotiate roles and responsibilities with the selected vendor. Some examples include:

• Tasks that fall within each activity type
• Expectations for timeliness and responsiveness
• Main point of contact for the institution with the vendor
• Limits to expenses the institution is willing to pay
• Unexpected or one-off needs for additional vendor support
• Identification of service levels required on campus

Mistake 3: Focusing on operations (instead of results)

The third mistake institutions make is focusing on operational details (such as staffing numbers, equipment used, and work frequency) rather than measurable results. While this focus on operations typically arises from a desire to ensure work is performed correctly, micromanaging the logistics of the contract may actually be detrimental to the institution for three reasons:

• It prevents the institution from benefiting from any expertise and innovation the vendor brings into the function
• It places unnecessary hurdles for vendors trying to operate in the most efficient and cost-effective manner possible
• It opens the door for disputes about which party is responsible for certain operational, logistical, or procurement activities not clearly outlined within the contract

One institution that faced this challenge was Stewart College (pseudonym). The institution established a food services outsourcing contract. One clause in the contract required the institution—not the vendor—to provide equipment and supplies. Because the service provider did not have to replace their own assets, they had no incentive to maintain the equipment or clean the supplies already provided. As a result, Facilities was forced to constantly resupply the service-provider at much higher costs than anticipated.

Instead, institutions should focus on crafting a contract that articulates measurable results, such as desired service levels. Institutions should include metrics and KPIs in the contract that both enable them to monitor performance and, where possible, link a small portion of the contract value to achieving performance goals. There is a wide array of metrics that institutions can use to track performance:

• Number of campus complaints
• Results from customer satisfaction surveys
• Number of concerns raised at weekly meetings
• Number of emergencies and outages
• Number of reactive calls from institutional actors
• Function-specific production rates, such as amount of square footage covered per employee

One institution that has done this particularly well is Chapman University. Their custodial contract holds the vendor responsible for managing the cost of their own supplies, but it does not specify how many employees are assigned to individual jobs. Instead, the contract places the responsibility for obtaining equipment, supplying staff, and performing the work on the service provider. By focusing on results, Chapman has leveraged its vendor’s expertise to achieve the institution’s desired custodial service levels.

Mistake 4: Misaligning institutional and vendor goals

The fourth mistake institutions make is misaligning the goals of both parties. A major source of tension arises when institutions view a contract as the minimum work the vendor will provide. By comparison, vendors typically understand contract criteria as the required amount and quality of work to be performed. This tension can lead to frustrations on both sides. By clearly connecting service provider goals with institutional desires in the contract, senior leaders can improve outsourced arrangement efficacy.

While not always obvious, senior Facilities officers can find opportunities to align institutional and vendor goals by focusing on the links between outsourced functions and campus needs. For example, Kimmel University (pseudonym) realized their service provider was not prioritizing preventive maintenance on their O&M teams. After exploring the problem, the senior Facilities officer realized that the vendor did not appreciate the scale of the deferred maintenance problem at the institution. More importantly, the vendor did not understand the importance of preventive maintenance to reducing the institution’s capital renewal backlogs. Senior leaders intervened, pressing the provider to achieve PM completion targets that led to a consistent reduction in deferred maintenance needs.

Approach 1: Vest the vendor in the success of the institution

First, institutions should explore vesting opportunities. While fixed payment service level agreements (where an institution pays a predetermined fee for services provided) remain the norm in higher education, more institutions have begun to explore gainsharing arrangements, where both parties share in the savings the vendor achieves. As vendors retain a sizable portion of the surplus, they are incented to find cost savings and better steward resources. In fact, many potential vendors also work in private sector industries, where performance contracts are common. At the same time, because a portion of savings comes to the institution, a gainsharing arrangement may improve senior leader attitudes towards outsourcing, making it an easier sell. Alternatively, some institutions use financial penalties to incentivize better performance. For example, St. John’s University in Jamaica, New York, has a clause in their custodial contract that stipulates financial penalties if the vendor fails to meet pre-established KPI scores for cleanliness and maintenance (e.g., scores below 85% cleanliness for two months in a row).

Approach 2: Connect contracted staff to the campus community

Second, institutions can provide avenues for the vendor to become part of the campus community. By helping the vendor understand how they impact the institution’s mission and values, institutions help embed the service providers in campus. Institutions can reinforce a cohesive culture in a variety of ways:

• Include contracted staff in appropriate meetings, such as town halls and all-hands meetings
• Incorporate institution’s colors into vendor uniforms or include vendor logo on campus-issued uniforms
• Solicit feedback and host listening sessions for contracted employees
• Link contracted and in-house staff together for professional development and mentorship when work responsibilities align

Mistake 5: Committing to unnecessarily long time frames

The final mistake institutions make is committing to unnecessarily long contract time frames. Long-term contracts frequently offer upfront financial benefits; however, these contracts can lock institutions into problematic or unsatisfactory arrangements without recourse to renegotiate.

For instance, one institution outsourced central plant management for a 25-year term. While this arrangement was initially financially beneficial, as the institution neared the end of the contract, leaders realized they could save $2 million a year operating the central plant themselves. This was due to lack of infrastructure investment by the vendor and the challenges of maintaining complex medical and research equipment. Because their contract lacked optouts and did not specify hand-back conditions, the institution was forced to wait for the contract to expire before investing again.

Most Facilities leaders agree that institutions should negotiate contracts for no more than five years, with one-year options to extend or exit. As well, experienced Facilities executives recommend allowing new vendors a window of 3-6 months to implement their processes and get the right people onto campus.

Implement oversight process to manage vendor relationship

While a well-structured contract lays the foundation for an effective working relationship between the institution and vendor, a truly successful partnership requires management on a monthly, weekly, and daily basis. Most institutions employ a contract manager to oversee daily vendor management, but this alone is not sufficient to ensure the relationship proceeds well.

This institution encountered very real issues with their vendors and contract staff, including theft and poor responsiveness. However, after switching vendors multiple times without improvement, Facilities leaders eventually diagnosed that unclear management, a lack of verification mechanisms, and poor communication with vendors were among the root causes. The institution felt the contract articulated clear expectations, but by not reinforcing those expectations and verifying vendor performance on a regular basis, the relationships were doomed to fail. There are three components to fruitfully managing a vendor relationship:

Component 1: Scope an empowered contract manager role

The first component for managing the outsourcing relationship is to hire a contract manager (CM) to enforce the terms of the arrangement. As the main point of contact between an institution and a vendor, CMs are an essential component of a successful outsourcing contract. This role ensures vendors fulfill contract criteria with minimal disruption to campus activity and works with vendors to improve processes and resolve complications.

While most institutions employ contract managers, the employees hired into these roles often lack the perspective or authority necessary to succeed. For example, a regional public university discovered that its CM had negotiated a $30,000 addendum to their custodial contract for a high-traffic student lounge—service that had already been guaranteed and covered in the initial contract. Removing this unnecessary addendum tied up the procurement, business, and legal offices for weeks.

Component 2: Implement a robust quality assurance process

The second component for managing the outsourcing relationship is to implement a quality assurance (QA) process. QA is the practice by which an institution independently evaluates the vendor’s performance against the contract criteria. While reactions and complaints from campus customers often bring the most egregious or extensive issues to the forefront, regular QA surfaces more subtle patterns. QA also allows Facilities to intervene earlier to improve vendor performance. This prevents underperformance issues from becoming vendor habits and allows Facilities to resolve concerns before campus stakeholders become frustrated (or notice the issue at all).

QA can take a variety of forms but generally possesses a few common characteristics. First, most institutions accomplish QA by employing inspectors either in house or contracted through a third party. Next, these inspectors regularly evaluate the vendor’s work. The duration between audits depends on the function, the size of the QA staff pool, and the relationship with the service provider, but frequently fall between weekly to monthly audits per function and/or space. Finally, these evaluations can incorporate a variety of information sources, including analyses of quantitative metrics (e.g., work orders completed, square footage cleaned, complaints resolved, etc.), qualitative observations or comments from impacted parties, and compliance completion checks.

Despite the principled focus of quality assurance, some institutions have found that some QA processes unintentionally promote biased, inaccurate, or unusable evaluations.

Component 3: Keep communication channels open through frequent interactions

The final component for managing the outsourcing relationship is to maintain transparent lines of communication between the various stakeholders involved in the arrangement.

While communication is essential for success during the development of an outsourcing arrangement, it becomes particularly important once the vendor begins work on campus. Poor communication between the vendor and Facilities leaders may lead to misunderstandings about performance or obstacles to improvement. At the same time, a lack of communication with campus customers may lead to dissatisfaction and frustration that ultimately stymies the arrangement.

Contract manager interview guide

This tool provides guidance on interviewing potential contract managers based on eight important characteristics. Each characteristic section includes sample questions to ask, as well as possible answers that either confirms the candidate’s possession of the characteristic, or should raise concerns about their qualifications.

Get the Tool

Download the Report